Fed’s Chief Attorney Says Faster Disclosure May Be Harmful

June 1 (Bloomberg) -- The Federal Reserve’s chief attorney
said a two-year delay in identifying recipients of emergency
loans from the central bank is appropriate and that a shorter
lag may harm the financial system and U.S. economy.

“We remain concerned that a more rapid release of
information about borrowers accessing the discount window and
emergency lending facilities could impair the ability of the
Federal Reserve to provide the liquidity needed to ensure the
smooth working of the financial system,” Scott Alvarez, general
counsel for the Board of Governors, said today. Alvarez
commented in joint testimony with Thomas Baxter, general counsel
for the Federal Reserve Bank of New York, to a House Financial
Services subcommittee.

While the two Fed attorneys didn’t cite a specific proposal
to alter the delay enacted in last year’s Dodd-Frank Act,
Representative Ron Paul, the Texas Republican who chairs the
subcommittee and who has advocated abolishing the central bank,
backs legislation to strip the Fed’s shield from congressional
audits of its interest-rate decisions and loan programs.

Paul said during the hearing that his goal is to gain more
transparency without bringing about any harm. He compared Fed
disclosure to the Securities and Exchange Commission, which can
demand reports and release information immediately, Paul said.

The central bank in December, under orders from Congress,
identified recipients of $3.3 trillion of emergency aid from
2007 to 2010. In March, the Fed released about 29,000 pages of
documents covering other loan programs after losing a court
battle against Bloomberg LP, parent of Bloomberg News, and News
Corp.’s Fox News Network LLC.

Dodd-Frank

The Dodd-Frank law requires the Fed to identify borrowers
about two years after loans are made.

“If institutions believe that publication of their use of
Federal Reserve lending facilities will impair public confidence
in the institution, then institutions may choose not to
participate in these facilities,” Alvarez and Baxter said.

“Experience has shown that banks’ unwillingness to use the
discount window can result in more volatile short-term interest
rates and reduced financial market liquidity that, in turn, can
contribute to declining asset prices and reduced lending to
consumers and small businesses,” according to the two men’s
testimony.

The Standard & Poor’s 500 Financials Index, which includes
82 banks and other financial companies, has gained 3.8 percent
since the first round of mandated disclosures on Dec. 1.

More Transparency

Asked during the hearing by Representative Lacy Clay, a
Missouri Democrat, if the increased Fed transparency has had any
adverse consequences for the central bank or the firms it
regulates, Alvarez said the disclosure, especially in monetary
policy, has been “very helpful.” The Fed is monitoring any
other effects and will tell Congress if changes are warranted,
Alvarez said.

Representative Walter Jones, a North Carolina Republican,
said the central bank is at a “very low ebb” in terms of trust
among the U.S. public, and “is not held in high esteem by many
people in this country.” He asked the Fed officials how the
central bank could give emergency aid to non-U.S. banks and
large companies such as McDonald’s Corp. while small-business
owners have trouble getting bank loans.

Alvarez responded that the Fed’s emergency-lending programs
weren’t designed to aid large companies “for the sake of aiding
big companies” and were instead designed to ease credit for the
broader population, even if they work through banks or financial
markets. One program helped generate 3 million automobile loans,
he said.